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January 24, 2002

Value of University's endowment declines

After years of double-digit growth, Pitt's endowment fell in value by 5.56 percent during the fiscal year that ended June 30.

That decline was larger, percentage-wise, than the average loss in endowment value (3.6 percent) last year among 610 institutions surveyed by the National Association of College and University Business Officers.

NACUBO's survey indicated that, for the first time in almost a generation, the average college endowment in FY 2001 lost value, according to the Jan. 18 Chronicle of Higher Education.

Pitt traditionally has pursued a conservative endowment investment policy, investing heavily in traditional assets such as U.S. corporate stocks — and that's why Pitt's endowment took a heavier hit from the stock market dive than many other universities did, said Arthur G. Ramicone, Pitt vice chancellor for Budget and Controller.

The Pitt endowment — which totaled nearly $1.1 billion at the end of the last fiscal year (June 30, 2001) — performed especially poorly compared with endowments at other schools with assets of $1 billion or more. Among those 41 institutions, the average endowment loss was 1.6 percent, versus Pitt's 5.56 percent loss.

Nine of the 41 endowments worth $1 billion or more posted positive returns.

Compared with most colleges and universities, schools with larger endowments tend to invest more heavily in alternative investments such as hedge funds, according to The Chronicle of Higher Education.

In a hedge fund, investors pool large sums of money to speculate in a various securities. "Hedging" refers to betting that a stock will lose value over a certain period, although not all hedge funds practice that strategy.

Compared with mutual funds, hedge funds are relatively free from government regulation, and they are open only to accredited investors, not individuals. Big endowments enjoy access to attractive hedge funds not available to endowments below $1 billion, the Chronicle noted.

With less of their assets invested in publicly traded domestic stocks, many big college endowments suffered less from last year's plunge in stock prices, according to NACUBO analysts.

Among the $1 billion-or-more club, Yale University's endowment posted the largest percentage increase last year — 9.2 percent — increasing the Yale endowment's assets to $10.7 billion. Yale invests just 15 percent of its endowment in publicly traded domestic stocks.

Last March, Pitt began moving toward a less conservative endowment policy when trustees voted to further diversify the University's portfolio.

The new plan aims to reduce Pitt's investment in domestic stocks from more than 40 percent of the endowment total to 30 percent, while doubling the allocation in alternative investments to 20 percent divided as follows: 10 percent in hedge funds and other "marketable alternatives" and 10 percent in "non-marketable alternatives" such as venture capital and buyout funds.

It will take Pitt another year to meet its allocation goal for marketable alternatives (currently, less than 5 percent of Pitt's endowment is allocated to hedge funds), and another year after that to meet the new target for non-marketable alternative investments, Ramicone predicted.

"With hedge funds, you have to take the time to seek out the best ones, and those funds have to be open to new money," he said. "You have to check out a hedge fund's investment strategies and historical returns, and see who else is investing in it."

In 1998, the value of Pitt's investment in a risky hedge fund — the Long-Term Capital Management Fund — suddenly plunged from $5 million to $400,000, after the fund nearly collapsed.

Even with that $4.6 million loss, the University earned a better-than-18 percent return on its original 1994 investment in the fund, according to Pitt's administration. Still, the experience may have left some trustees and administrators leery of hedge funds. (While the trustees' investment committee sets the percentages of endowment monies for specific types of investments, Pitt finance staff and outside consultants choose the actual investments.) According to Ramicone, the "root cause" of Pitt's endowment loss last year was the University's conservative endowment policy. "Now, why was it conservative? Well, some people like hedge funds and others don't," the vice chancellor said. "I would just leave it as: We had a conservative endowment policy."

Conservative — and successful, until FY 2001. In the previous fiscal year, Pitt's endowment earned a 13.7 percent return, slightly better than the 13.2 percent average that year among the colleges and universities surveyed by NACUBO.

Last June, outgoing Board of Trustees Chairperson J.W. Connolly reported that Pitt's endowment had grown from $463.2 million in 1995 to $1.12 billion as of the end of May 2001.

— Bruce Steele

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